MARKET COMMENT
Text Book Investments

By David Kuo (TMFDragon)
January 29, 2004

Britons love to read. This love of the printed word helped the UK book market grow some 4% per year from 1998 to 2002. By 2002, the UK book market was estimated to be worth almost £2.5b.

Within the UK book market, purchases by consumers are the most significant area, estimated to have amounted to some £2b in 2002. The ever-increasing numbers of new titles has been the main driver of growth here. Furthermore, books can now be found not only in bookshops but also in the supermarkets!

The institutional market has also enjoyed growth, and this has come about from an increase in sales to schools and libraries. It is estimated that institutional sales grew 4.9% in 2002 – slightly faster than the overall market. Furthermore, it's reckoned this growth will continue.

Interestingly, despite the huge value of the UK book market, there are only a handful of significant publishers. Amongst those listed on the UK stock market, the Anglo-Dutch publisher Reed Elsevier (LSE: REL) is by far the biggest.

Reed Elsevier, which owns Academic Press, is expected to post a pre-tax profit of £530m this year. Profits are forecast to rise to £546m the year after. Earnings per share of 33p have been pencilled in. That means the shares, at 465p, are on a valuation of 14 times earnings. Borrowings of £1.6b are a bit too high for my liking and the dividend yield is an unappetising 2.7%.

Pearson (LSE: PSON) is the second-largest quoted publisher. It owns Addison Wesley Longman, DK Publishing and Penguin. It is also the owner of the Financial Times. Recently, the company has been awarded a worldwide contract worth $200m to develop and administer the Graduate Management Admissions Test for seven years.

Pearson is pencilled in for a pre-tax profit of £417m this financial year, rising to £464m in 2004. With earnings per share estimated to come in at 34p, the company is valued at 18 times earnings. The dividend yield, with its shares at 617p, is an above-market 4.1%.

Taylor & Francis Group (LSE: TFG) is another significant player in publishing circles. The company specialises in scientific and medical books, which tend to be less vulnerable to price competition. Pre-tax profits at Taylor & Francis have increased year-on-year from £7.5m in 1998 to £33m in 2002  - an improvement of 340% over 4 years. Profits are expected to improve again to £40m in 2003, and by a further 14% to £45m in 2004.

Growth, mainly through acquisition, is clearly high on the agenda at Taylor & Francis. That perhaps explains the company's reluctance to pay a decent dividend - a prospective yield of just 1.0% is expected. That said the shares, which stand at 525p, are not that expensive. Earnings per share are expected to come it 37p, which values the company at 14 times prospective profits.

The educational book market is unlikely to ever set the investing world alight. However, the duel attractions of sustainable growth and a limited number of players should make this sector a good prospect for the long term.